Where is the leadership?

Inflation eroded gains in U.S. consumer spending and a gauge of business sentiment fell to the lowest level in more than six years, pushing the economy toward a recession.

While purchases rose 0.4 percent in January, the Federal Reserve's preferred measure of inflation climbed 0.3 percent, the most in four months, the Commerce Department said today in Washington. The National Association of Purchasing Management- Chicago said its index of business activity tumbled to 44.5 in February. Readings below 50 signal a contraction.

There is a sense in the markets there is no real leader to project confidence in these trying times.

It looks like the markets have taken over and Washington is trying to react the best they can.

This is not enough!

The markets always win.

More on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

Watch real interest rates

Feb. 28 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke's readiness to cut interest rates to avert a recession is stoking concerns that prices will get out of hand.

Bernanke told lawmakers the Fed anticipates inflation will slow, in part because of ``sluggish'' economic growth and rising unemployment. In their quarterly forecasts published this month, central bankers projected prices, excluding food and energy, will rise 2 percent to 2.2 percent this year, slowing to a 1.7 percent to 2 percent pace in 2009.

Money is cheap. Real short-term interest rates are too low.

Inflation is under control when short-term interest rates are 1.5-2.0 times inflation. In other words, with inflation close to 4%, short-term interest rates should be close to 6%-8%.

The rate on 13-week Treasury bills instead is close to 2%. Wow! And Mr. Bernanke says he wants to control inflation?

The dollar, meanwhile, is sinking and gold and most commodities are soaring. It looks more and more like the investment environment of 2002-2003.

The markets always win.

More on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

HOUSE FINANCIAL SERVICES COMMITTEE TO HOLD HEARINGS ON MONETARY POLICY

This is an interesting hearing on the state of the economy. Go to the address shown below. You will be able to see/hear the full testimony on webcast.
http://www.house.gov/apps/list/hearing/financialsvcs_dem/ht022608.shtml

Washington, DC – Rep. Barney Frank (D-MA), chairman of the House Committee on Financial Services today announced that the committee will hold two days of hearings to examine the conduct of monetary policy and the state of the U.S. economy. A panel of economists will address these issues during the first day of hearings. The second day of hearings will be dedicated to the semi-annual testimony of Federal Reserve Chairman Ben Bernanke.

On February 20, 2008, the Federal Reserve joined other forecasters in predicting slower economic growth, higher unemployment, and an elevated rate of inflation for the U.S. economy. In light of these forecasts, the hearings will focus on the appropriateness of monetary policy over the past six months and consider what further actions might be taken.

Witness List & Prepared Testimony:

Alice Rivlin, Senior Fellow, Brookings Institution
Mark Zandi, Chief Economist, Moody’s Economy.com
Nouriel Roubini, Professor, NYU, and Chairman, RGE Monitor
Carmen Reinhart, Professor, University of Maryland
John Taylor, Professor, Stanford University

George Dagnino, PhD

No need to pay your mortgage

Joe Lents hasn't made a payment on his $1.5 million mortgage since 2002.

That's when Washington Mutual Inc. first tried to foreclose on his home in Boca Raton, Florida. The Seattle-based lender failed to prove that it owned Lents's mortgage note and dropped attempts to take his house. Subsequent efforts to foreclose have stalled because no one has produced the paperwork. (Source: Bloomberg)

What is happening is really crazy! What were the lenders thinking? Are they going to learn? Only if they pay. Mr. Lents is teaching them an important lesson!

George Dagnino

The German economy and the US dollar

Gernot Nerb, chief economist at the Ifo research institute, talks about the factors behind the unexpected rise in the February German business confidence index reported today, including consumer demand and the role of emerging markets in offsetting the effects of slower U.S. economic growth. Evidence that confidence in Europe's largest economy is holding up may reduce the need for the European Central Bank to lower interest rates. (Source: Bloomberg)

This is an important reason why the Euro is much stronger than the US Dollar.

More on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

An interesting question

Paulson was Staff Assistant to the Assistant Secretary of Defense at The Pentagon from 1970 to 1972. He then worked for the administration of U.S. President Richard Nixon, serving as assistant to John Ehrlichman from 1972 to 1973.

He joined Goldman Sachs in 1974, working in the firm's Chicago office. He became a partner in 1982. From 1983 until 1988, Paulson led the Investment Banking group for the Midwest Region, and became managing partner of the Chicago office in 1988. From 1990 to November 1994, he was co-head of Investment Banking, then, Chief Operating Officer from December 1994 to June 1998; eventually succeeding Jon Corzine (now Governor of New Jersey) as its chief executive. His compensation package, according to reports, was US$37 million in 2005, and US$16.4 million projected for 2006.His net worth has been estimated at over 700 million.
On May 30, 2006, Treasury Secretary John W. Snow resigned. Bush immediately nominated Paulson to head the Treasury department. On June 28, 2006, the United States Senate confirmed Paulson to serve in this position.

Paulson's three immediate predecessors as CEO of Goldman Sachs — Jon Corzine, Stephen Friedman, and Robert Rubin — each left the company to serve in government: Corzine as a U.S. Senator (later Governor of New Jersey), Friedman as chairman of the National Economic Council (later chairman of the President's Foreign Intelligence Advisory Board), and Rubin as both chairman of the NEC and later Treasury Secretary under President Bill Clinton.

OK George, what is your point?

My point it that Mr. Paulson is a high caliber financier. Is it a coincidence he was given the job of Treasury Secretary just ahead of the derivative credit crisis?

More on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

The markets always win

One more example.

The Fed lowers interest rates below inflation. This action is inflationary.

Inflation rises.

Long-term interest rates rise to reflect a higher inflation premium.

Borrowers/investors borrow less.

Consumers buy less because of loss of purchasing power due to rising inflation and because of higher borrrowing costs.

The Fed is in a box. The markets win.

More on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

Say goodbye to the market system

I shiver as I listen to what is going on in Washington these days about the debacle of the derivative/credit system and I reflect on this country's idea of the market system.

Regulators and the law are slowly strangling us until they own us. Not by design. It is just the process. What happened to taking risk and let the winner win and loser lose?

What did the regulators do and think when a great housing bubble started deflating? There are books and books written about the real estate credit cycle and consequences of the contraction of this crucial sector of the economy. Why did they not worry about it?

Because bureaucrats do not have responsibilities and do not have anything to lose. Their standard answer is: we do not have enough power and we need more regulations.

This is how power is slowly transferred from the public to the bureaucracy. This is what will happen to us. It is inevitable. I have seen it before.

Yours truly.

George Dagnino

Retail sales were weak

The market rejoiced because retail sales were better than expected. Nonsense.

The data show (click to enlarge chart) that retail sales adjusted for inflation were very weak and close to recessionary levels.

This trend has great importance for the selection of asset classes.

More on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

How free markets change to a socialist system

The following is a great commentary written by Dr Irwin Kellner.

"Franklin Delano Roosevelt's method of dealing with the Great Depression will be the rallying cry in Washington after the elections, no matter which party wins the White House.

It's as plain as the nose on your face. The days of wine, roses and deregulation are numbered. In their place will be a slew of regulations aimed at the financial services sector, which will have far-reaching consequences for the markets and the economy.

The forces of free markets have held the upper hand for more than a quarter of a century. Now it looks as though the advocates of a more active government will become ascendant.

The two major candidates for the Democratic nomination have already indicated that they favor a more active role for government. And if the Republicans' frontrunner, Sen. John McCain, R-Ariz., should become president, he will probably move in this direction as well.

The Wall Street Journal quoted him the other day as saying that "unfettered capitalism is not something that I support." He added: "...from time to time throughout our history, there are excesses and we (had) to fix them as quickly as possible ... we have to take measures to make sure they never happen again."

There is certainly plenty of precedence for a swing of the pendulum away from free markets toward increased government intervention in times of economic distress, such as we have now with the subprime crisis.

FDR's New Deal consisted of a myriad of laws aimed at combating the Depression.
Among them was the Glass-Steagall Banking Reform Act, which separated commercial from investment banking, the Securities and Exchange Commission, which began federal regulation of the stock market and the Wagner Act, which guaranteed workers the right to form unions.

In addition, a number of "alphabet agencies," such as the Agricultural Adjustment Administration (AAA), the Civilian Conservation Corps (CCC) the Federal Emergency Relief Administration (FERA) and the Works Progress Administration (WPA) were created to provide immediate relief while laying the groundwork for economic recovery.

These also firmly established the influence of government over the private sector.

From there you can fast-forward to the Basel Accord of 1988. This was the result of an agreement reached by the central banks and supervisory authorities of 10 countries to strengthen the international banking system by establishing new capital adequacy standards for the banks.

This impacted the banks' profitability by forcing them to set aside funds that they might otherwise use to make money.

The collapse of Enron Corp. precipitated the passage of Sarbanes-Oxley and its accompanying Public Company Accounting Oversight Board. I don't have to tell you what that has done to corporate managements, their boards and their accountants.
Even now, there is talk of more regulation.

Last month, the Senate began investigating the investments being made by sovereign wealth funds controlled by foreign governments. And just last week, the Financial Stability Forum, which includes central bankers, banking supervisors and other financial authorities, said that increased oversight might be needed if market-led improvements don't work.

Next year, expect a number of hearings aimed at finding out the origins of the subprime mess, who was at fault (or asleep at the switch), how it can be ameliorated and prevented.

As a result, there will be more regulations, thus government interference in the free markets, and more caution on the part of lenders and brokers. Besides the effects this will have on the economy, look for the rate of homeownership to decline as well.
>p>As I warned in November, beware of the law of unintended consequences. See column
Irwin Kellner is chief economist for MarketWatch and for North Fork Bank."
http://www.marketwatch.com/news/story/beware-unintended-consequences/

As a country looks for more protection, it becomes suffocated by regulations hindering growth. Stagnation follows. Going back is difficult as the bureaucracy resists the dismantling of their power. The living example is Italy. It si collapsing but is not changing.

More on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

GE moving $$$$ to London

GE is moving the headquarters of its core consumer finance division from Connecticut to London.

The reason underlines the increasingly global nature of GE, according to the Financial Times.

The main reason, in my view, is that Wall Street and the US are losing the competitive battle even in the financial sector.

And then you wonder why the dollar is weak.

More on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

Question from a reader

In your opinion, will the monoline insurance companies like Ambac and MBIA be downgraded and forced into bankruptcy thus exasperating the credit crisis forcing more losses in the markets index averages?

Answer. It is risky to speculate about this sort of things. The hard fact is that our proprietary financial risk indicator is moving higher. And this is bad news.

More on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

Short-term interest rates to fall

The rate on 13-week Treasury bills stands at 2.06 right now.

The historical relationship between the rate on Treasury bills and the fed funds rate suggests that the Fed will have to lower their target rate to 2.25%.

The markets always win!

More on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

The future of democracy is socialism

The worst drop in new home sales on record has turned financial leaders into champions of big government with everyone from Russo to executives at Citigroup Inc. and JPMorgan Chase & Co. supporting public measures to keep the housing market from sinking the economy. It's a change from Wall Street's usual stance that markets work best without government interference.(Bloomberg)

This is one of the classic developments. We ask more and more to the government, this mystical assembly of geniuses.

There is always something bigger and better to do. Eventually the government, as represented by its bureaucracy, slowly and steadily gobbles up more and more of our resources.

Maybe this is one of the reasons behind the fall of our currency. It reflects our failure to deal with the issues without relying on big government.

Socialism is about believing that governments can deliver the perfect society. And every crisis is another little step toward this non-existing idyllic world.

George Dagnino, PhD

The US market outperforms

The looming recession, intractable current account deficit, shrinking dollar and housing slump that shows no signs of abating aren't preventing the Dow Jones Industrial Average from beating all of the world's biggest stock markets. That's because the Federal Reserve is the only central bank determined to drive interest rates lower.

Even as U.S. stocks suffered the worst January in 18 years, they still outperformed Japan, China, the U.K., France, Hong Kong, Germany, Canada, India and Brazil. Home Depot Inc., General Motors Corp. and JPMorgan Chase & Co. helped the Dow limit last month's loss to 4.6 percent compared with a 9.1 percent drop by MSCI Inc.'s index of 22 other developed markets.

More on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977